bank of england

Billions of pounds have been taken out of UK equities since the Brexit referendum of June 2016 but there are still opportunities that should not be overlooked, a conference has heard.

Speaking at the Investival conference hosted by AJ Bell yesterday (November 15), Mark Barnett, head of UK equities at Invesco, said global investors had taken the view that “politics are too hot”, which overshadowed the fact the economy has not done as badly as many might have expected.

Mr Barnett said: “I have a myriad of other (investment) opportunities I’d rather be looking at elsewhere in the world, and therefore I would underweight UK equities.

“Within that category of UK equities, however, there is a subset of companies particularly exposed to the UK economy and those are the cheapest of all – I think that’s really where the opportunities are.”

Instead of UK assets, he suggests fund managers like himself have been seeking assets that offer uncorrelated returns to the economic cycle and political uncertainty.

He said: “They may be involved in things like catastrophe insurance or litigation or litigation finance or alternative lending etc.

“They’re business that may have a cycle but they sit outside of the general economic cycle, I think they offer quite big attractions for funds like ours.”

The comments came after figures released by the Investment Association in October showed investors have withdrawn £10bn from UK equity funds since the Brexit vote in June 2016.

UK equity income funds open to advisers were battered further this week by uncertainty around the current Brexit deal.

However, in reality the economy was doing “just a bit better” than was expected directly after the referendum, Mr Barnett said.

He said: “The overlay in the UK has absolutely been political – there has been evidence of the economy in aggregates since the referendum, and while it has performed a little bit worse since the referendum, it hasn’t been significantly bad.

“Actually, at the moment things are improving – the government is putting money back into the economy, it is talking about the end of austerity, and while this is mostly tinkering with the numbers effectively there is more government money coming back in, and the government stands ready to do more if they need to.”

Also speaking on the panel, James Harries, a fund manager at Troy Asset Management Limited, told delegates that “while we have been in a rising rate environment, we are not in a rising rate environment anymore”.

“If you look at the UK, the average Bank of England base rate since 1700 is 3.5 per cent – so can rates double from where they are now? Absolutely. And they will.”

He said the trickier economy to predict was actually Europe, which was “in a trap due to negative interest rates – a disastrous economic policy”.

Mr Gartside said: “It embeds a deflation mindset and of course they target inflation, and when you look at inflation in the eurozone, it’s at rock bottom levels.

“Probably the best you can hope for there is to go from -14 to 0.”

Mr Barnett also noted that a higher rate environment posed the risk that, because policy settings have been very low, decisions have been made by consumers and companies on that basis, and these may now have to be adjusted for a higher rate environment.

He added: “We [also] don’t know how the US consumer is reacting already to an environment of higher rates.

“My sense is that having already had a number of rate rises as we just heard, the risk of a policy mistake is higher now than ever in the last 10 years.

“In part, because rates haven’t moved for 10 years so there’s been no change. But I do feel that – listening to what governments are saying – they are absolutely intent to keep moving rates up.”

Also speaking during the session, Ainslie McLennan, fund manager of UK property at Janus Henderson, pointed out that the market has historically operated quite well in a normal interest rate environment of between 3 to 4 per cent.

She said: “The yield on portfolios like ours is about 5 per cent. So we feel quite comfortable about it. The important element for us is that it is slow and steady, as opposed to drama.

“Commercial property often gets hit by the idea of drama more than what happens in real terms, and so we’re kind of sensitive to that. But if its slow and steady, it would be fine.”

The current rate of growth is as good as it gets for UK consumers, Mark Carney has said.

The governor of the Bank of England was speaking after the central bank decided to leave interest rates unchanged at 0.75 per cent.

Mr Carney said the UK economy was “probably growing about as fast as it has capacity to without pushing up prices quickly”.

In fact the Bank of England cut its forecast for UK growth by 0.1 per cent for this year and next.

The definition of how fast an economy can grow without a sharp rise in inflation is called the trend rate of growth.

An economy can grow much faster than the trend rate in the short term but this leads to higher inflation, which typically provokes the central bank to raise interest rates quickly, which tends to reduce economic growth.

An economy growing at markedly above or below the trend rate of growth does so because of government or central bank policy, before reverting to the trend over time.

The Bank of England’s assessment was made before the Budget of 29 October, in which Chancellor of the Exchequer Philip Hammond unveiled tax cuts and increased public spending, initiatives which both Mr Hammond and his Labour Party counterpart John McDonnell said would stimulate growth in the short term.

Andy Haldane, the Bank of England’s chief economist has said the UK leaving the European Union was likely to reduce the long-term trend rate of growth to 1.5 per cent, down from the previous level of 2 per cent.

Mr Haldane’s view was that the trend rate of growth in the economy was determined largely by the size and productivity of the working age population.

He said migration into the UK was likely to fall after Brexit, reducing the size of the working age population and so reducing the trend rate of growth. He said migrant workers were, in aggregate, more productive than native workers so a reduction in migration would also reduce the trend rate of growth.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said the uncertainty around the outcome of the Brexit negotiations meant the Bank of England had little choice but to leave interest rates unchanged.

He said the central bank painted a “dreary” picture of the long-term growth potential for the UK economy which indicated interest rates would remain low relative to history for the long term.

In the quarterly inflation report, released alongside the interest rate decision, the Bank of England said it expected to put interest rates up in the next 12 months if the economy continued on its current trajectory, but also said it may have to put interest rates up in the event of a disorderly Brexit, even if economic growth has slowed dramatically, to prevent sterling collapsing in value and delivering an inflation shock to the economy.

David Cheetham, chief market analyst at XTB, said the market reaction to the news was muted because various aspects of the Bank of England’s communication were “mixed”.

Paul Stocks, financial services director at Dobson and Hodge, said Brexit was one of many issues facing investors now, but he was trying to invest on behalf of clients for a longer term time frame.

He said he tended to have more global funds in his clients portfolios than UK ones due to a wave of issues.

Bill Casey, a UK equity fund manager at Schroders, said he was investing more in UK companies that have defensive characteristics.

Britain’s budget announcement on Monday and a “Super Thursday” at the Bank of England would normally be key moments for the world’s fifth-biggest economy, but this time they are likely to be overshadowed by the drama of Brexit.

Finance minister Philip Hammond and Bank of England Governor Mark Carney have little option but to sit on the fence as they wait to see whether a no-deal exit from the European Union, which they warn would harm the economy, can be averted.

Both men have other business they want to get on with.

Hammond is under pressure from Prime Minister Theresa May to end a decade of austerity to see off a rise in popularity of the opposition Labour Party.

At the BoE — where an interest rate decision and economic forecasts are due to be announced on Thursday — Carney and his fellow policymakers want to progress with their plan to raise borrowing costs gradually over the coming years.

That would allow the British central bank to follow the lead of other central banks, especially in the United States and Canada, which are dismantling 10 years of massive stimulus.

Expectations of another rate hike by the U.S. Federal Reserve in December are likely to grow if the monthly payrolls report on Nov. 2 shows further jobs growth and rising pay.

In the euro zone, data on economic growth and inflation on Tuesday and Wednesday will show whether the recovery in the single currency area has kept pace.

But in Britain, with Brexit just five months away, things are much less clear cut.

BREXIT FOG

There is no sign of a Brexit breakthrough with Brussels, in large part because May’s Conservative Party is riven over how close Britain should remain to the European Union after it leaves the bloc.

“The budget is likely to be something of a holding exercise until the Brexit fog clears and the MPC is likely to remain in a state of inertia until there is a bit more clarity on the state of the Brexit negotiations,” Ruth Gregory, an economist with Capital Economics, a research firm, said.

When he stands up in parliament on Monday afternoon, Hammond is expected to use his high-profile budget speech to try to cool the Conservative rebels by dangling the prospect of higher spending in the future, as long as a Brexit deal is done.

Britain’s economy has slowed since the 2016 referendum decision to leave the EU. But it has not suffered as badly as many forecasters expected, giving Hammond some fiscal wiggle room to fund higher health spending already promised by May.

Hammond might get further help if Britain’s budget forecasters scale back their estimates of future deficits, as they have suggested they will.

But his ability to ramp up spending in other areas depends most on avoiding a new shock to the economy.

A no-deal Brexit would slash economic growth to just 0.3 percent a year in 2019 and 2020 compared with 1.9 and 1.6 percent if there is a deal, the National Institute of Economic and Social Research estimated on Friday.

Britain’s budget deficit would stop falling and would rise under a no-deal scenario, according to its forecasts.

Looking further ahead, Hammond has suggested he will need to raise taxes to help fund higher public spending.

SIGNS OF PAY “NEW DAWN”

But the prospect of getting controversial measures passed in parliament, where the Conservatives have no outright majority, is probably too daunting at a time of heightened Brexit tensions.

For the BoE, the Brexit stakes are high too.

It has begun raising interest rates from their crisis-era levels and its chief economist has said he sees signs of a “new dawn” for British workers’ pay, long the missing link in the country’s recovery from the financial crisis.

But most economists think it will wait until May to raise rates again, assuming Britain leaves the EU with a deal.

“In any other situation, we suspect the Bank of England would be looking to increase interest rates pretty soon,” ING economists said in a note to clients on Friday.

“But inevitably, Brexit remains policymakers’ number one consideration, and given that there may still be some time before we know for sure whether a deal will be in place before the UK formally leaves the EU, there is a risk growth slows as businesses and consumers grow more cautious.”

The vote to leave the European Union (EU) made by the UK electorate in June 2016, plunged the UK into economic uncertainty.

The debate facing policy makers up to that point in 2016 was how to square the circle of improved economic growth and falling unemployment with a lack of real wage growth, and sluggish productivity.

Those problems haven’t gone away, but have been swept from the consciousness of policy makers, the public, and their financial advisers faced with the challenge of understanding what the economic climate will look like when the UK exits the EU.

Jeremy Lawson, an economist at Aberdeen Standard Investments, says the reason many policy makers, economists and advisers, including himself, are perceived to have been wrong about the economic situation in the aftermath of the Brexit vote, is because the change that happened in the economy was a “supply shock”, and not a “demand shock”.

Mr Lawson explains: “Economists – because most economists are in favour of remain – forgot that if a majority voted to leave, well, that majority were not shocked by the outcome, so they didn’t stop spending or change their behaviour.”

Supply and demand

Demand shocks tend to have a more immediate impact on the economy as people stop spending, while supply shocks lead to lower growth over the longer term.

Mr Lawson’s point is that demand shocks happen when the general public think their immediate economic prospects will become worse, and so reduce spending, causing the level of demand for goods and services to fall, and send the economy into recession.

Economists – because most economists are in favour of remain – forgot that if a majority voted to leave, well, that majority were not shocked by the outcome, so they didn’t stop spending or change their behaviour.

Jeremy Lawson

He says that leave voters were happy with the outcome and therefore didn’t think their economic prospects had weakened, so continued to spend, meaning demand didn’t fall.

A supply shock happened because the fall in the value of sterling caused input costs for goods and services to rise – for example, oil and metals. This makes it more expensive for those who supply goods and services to do so, limiting supply, while investors pulling capital out restricts the supply of capital in the economy, and workers leaving the country restricts the supply of labour.

All of those things are harmful to the long-term health of the economy, but the effects are felt in small doses over a prolonged period of time, rather than as a sharp shock, as many had anticipated.

Andy Haldane, chief economist of the Bank of England, speaking before the Treasury Select Committee of the UK parliament in February 2018 quantified the impact of those supply shocks.

He said the long-term trend rate of growth, which is defined as the level of growth an economy can achieve in normal times without exceptional policies being pursued, will be 1.5 per cent a year as a result of Brexit, rather than the 2 per cent a year that would be the case without Brexit.

His assumptions are based on the Bank of England assuming that a deal is reached between the UK and the EU on the terms of the UK’s exit.

Source: Heartwood Investment Management

Mr Haldane’s boss, Bank of England governor Mark Carney, told the Treasury Select Committee in September that the most immediate impact of a ‘no deal’ Brexit is that interest rates would rise.

The Bank of England has been happy to ignore the higher inflation caused by the fall in sterling that occurred in the immediate aftermath of the vote. The central bank’s view was that this inflation was temporary, and that supporting economic growth through keeping interest rates low was more important than curtailing temporary inflation.

But Mr Carney notes the inflation that would likely be the result of a no deal Brexit would be more permanent in nature, as it would be caused by a worsening of the supply shock.

The Bank of England’s view in that situation is rates would have to rise in order to protect the value of sterling, even if that means unemployment rises and the rate of economic growth slows.

Henry Dixon, a portfolio manager on the UK equities team at Man GLG, observes if sterling were to fall by more in percentage terms than the cost of tariffs on UK exports, then there could be a boost to the economy.

Mr Lawson says the shock to the economy of a no deal Brexit would wipe out any of the gains from a fall in the value of sterling, and that a recession would be inevitable.

The Bank of England’s stress tests, which seek to paint a picture of what the economy would look like in the event of a no-deal Brexit, predicted unemployment and inflation would reach levels seen in the financial crisis.

David Coombs, multi-asset investment manager at Rathbone Unit Trust Management, adds, “it is hard to see” how the UK could avoid a recession if the UK exits without a deal.

Britain’s economy is finally off the interest rate life-support brought in nearly 10 years ago after the financial crisis struck.

But experts warn “deep scars” left by the recession has made the UK vulnerable to new shocks.

When the Bank of England pushed the button on its milestone interest rate rise last November, it marked the first hike since July 2007, when Gordon Brown had just taken over as prime minister and markets were blissfully unaware of the financial crisis brewing.

Now following the second increase to 0.75% this August, rates are at last above the emergency low of 0.5% where they had languished since the Bank’s dramatic cut in March 2009 to contain the fall-out from the crisis.

Bank of England Governor Mark Carney said the economy is now at a new ‘lower speed limit’ (Victoria Jones/PA)

But does this mean the economy is back to normal?

Most economists and even the Bank Governor Mark Carney himself have been quick to stress that, while fairly resilient, Britain’s economy is now merely trundling along at a “new, lower speed limit”.

Official data showing unemployment at a 43-year low masks the long-lasting effects that the crisis and subsequent recession has had on the economy.

“It’s clear that 10 years on, the recession has left deep scars on the labour market and average family real incomes,” according to Chris Williamson, chief business economist at HIS Markit.

“The long-term damage is evident in the sheer scale at which the economy has failed to catch up for lost growth,” he said.

The recession that followed the credit crunch and financial crisis saw output plummet by more than 6%, as it began shrinking in the second quarter of 2008 and continued to contract until the third quarter of 2009.

It took five years for the economy to get back to the size it was before the recession and in the aftermath, unemployment reached its highest rate since 1995, with almost 2.7 million people looking for work by the end of 2011.

The Office for National Statistics (ONS) calculated in April that the economy is now around 11% bigger than it was before the recession.

But it is far behind where it would have been if the crisis and recession had not happened.

Recession key facts

The economy fell by more than 6% during the 2008-09 recession

Unemployment reached its highest rate since 1995

The economy is now around 11% bigger than it was before the recession

Mr Williamson said: “It’s likely that the economy is around 15% smaller than it would have been if a recession had been avoided. This is growth that has been lost forever.”

And while unemployment returned to its pre-downturn rate at the end of 2015, earnings have failed to keep up with inflation, with only a brief period of respite in recent months.

The UK’s so-called labour productivity – how much money each worker adds to the economy – also slumped in 2008 as the recession struck and has not recovered since.

Some of this may also be down to a fundamental change in the labour market, given the rise in the “gig” economy as the likes of ride-hailing service Uber have increased temporary, freelance workforces.

But as experts have been left scratching their heads over how to resolve the “productivity puzzle”, they have come to the conclusion that UK growth – at 0.4% in the latest quarter – is limited to a “new normal”.

Laith Khalaf at Hargreaves Lansdown said: “In today’s economic climate, 0.4% quarterly growth draws a small cheer from the crowd, though it would have been deemed below par prior to the financial crisis.

“In the 10 years running up to the crisis, UK economic growth averaged 0.73% per quarter.”

Where once rate hikes would have signalled a booming economy that needs be reined in, the last two increases are taking place when activity is expanding relatively slowly.

Mr Williamson said: “It would be wrong to believe that the raising interest rates means we are back to normal.

“In fact there is a ‘new normal’ which means that, due to the drop in productivity and other structural changes to the economy – such as reduced immigration – the economy cannot grow as fast as it used to without inflation rearing its head.”

So while the tenth anniversary of the financial crisis sees the economy now in a very different place from the dark days of 2008-2009, it has been left with challenges and the ever-present threat of new risks emerging, not least the Brexit deadline and global trade wars.

Philip Shaw, an economist at Investec, said Britain has also been left in a weakened state.

“In many ways, the economy is less resilient than it was pre-crisis. There’s less room to stimulate monetary policy,” he warned.

At least I’m not waking up in a cold sweat any more

Philip Shaw, Investec

At 0.75%, the Bank has little to offer this time around in terms of rate cuts to ward off the threat of another recession – a risk that has become all too real as Brexit talks flounder.

Mr Williamson said it hangs in the balance: “A bad deal, with high tariffs and non-tariff barriers for example, is unlikely to be one that the economy fares well against, and could lead to another recession. However, a good deal could see the economy regain strength.”

The Government has at least got its own finances to a more stable position to withstand wider shocks.

Borrowing is forecast to fall to £37.1 billion this financial year – far below the heady days after the crisis, when it had at one stage spiralled as high as £151.7 billion in 2009-10.

This should give a little comfort amid the Brexit anxiety, according to Mr Shaw.

“We will get through this,” he said. “We’re in a much better space than we were 10 years ago.

Britain’s economy is holding its solid pace of growth, according to a survey which showed the large services sector expanded more strongly than expected in August, but Brexit worries are hitting investment plans and confidence.

The IHS Markit/CIPS Purchasing Managers’ Index (PMI) increased to 54.3 in August from 53.5 in July, beating all forecasts in a Reuters poll of economists and rising further above the 50-mark that indicates growth.

The PMI pointed to a repeat of the overall economy’s 0.4 percent quarterly growth rate recorded in the three months to June, IHS Markit said, despite weaker than expected manufacturing and construction PMIs earlier this week.

Separate PMIs suggested the euro zone economy was on course to grow at the same pace in the third quarter.

“(This is) a relatively robust and resilient rate of expansion that will no doubt draw some sighs of relief at the Bank of England after the rate hike earlier in the month,” IHS Markit’s chief business economist, Chris Williamson, said.

Sterling edged up on Wednesday after the survey was published, but is down more than 10 percent against the U.S. dollar since April when concerns about the potential for an economically damaging Brexit began to build.

Howard Archer, an economist with consultants EY ITEM Club, said the mixed set of August PMIs showed why investors were not expecting the BoE to raise borrowing costs further any time soon, after August’s quarter-point increase to 0.75 percent.

“It looks unlikely that interest rates will rise again until after the UK leaves the EU in March 2019 given the major uncertainties that are likely to occur in the run-up to the UK’s departure,” Archer said.

Britain’s economy has slowed since the June 2016 Brexit vote, its growth rate slipping from top spot among the Group of Seven group of rich nations to jostling with long-term laggards Japan and Italy for bottom place in the rankings.

Nonetheless, last month the Bank of England raised interest rates for only the second time in a decade, due to concerns that labor shortages and other capacity constraints will prevent inflation returning to its 2 percent target in the short term.

Employment intentions in the services sector rose to a six-month high, but confidence for the year ahead slipped to its lowest since March, as businesses said Brexit uncertainty had made clients less willing to invest, for now.

British Prime Minister Theresa May has yet to agree the terms of Britain’s future relationship with the European Union, less than seven months before the country leaves the bloc.

Financial services accounted for much of the growth, and businesses reported softer demand from retailers, who are not directly covered by the services PMI.

Many consumers are feeling the strain of inflation that has been growing faster than their wages for much of the past decade.

“Given the increasingly unbalanced nature of growth and the darkening business mood, risks to the immediate outlook seem tilted to the downside,” Williamson said.

Firms in the PMI survey reported paying higher salaries to recruit hard-to-find staff and reduce employee turnover that was limiting their ability to complete some projects.

Official data showed record vacancies and unemployment at a 43-year low in July, but this has not translated into widespread pay rises for the workforce as a whole.

British factories had their worst month in five-and-a-half years in April, suggesting the economy’s weak start to 2018 has persisted and lowering the likelihood of the Bank of England raising interest rates again any time soon.

Sterling slid as data showed the biggest fall in factory output since 2012 due to tepid demand at home and abroad.

The Office for National Statistics also said Britain posted its biggest trade deficit since September 2016.

“The rebound in GDP as a whole in Q2, if there is one, could be pretty subdued and it certainly questions the likelihood of another rate increase in August,” Investec economist Philip Shaw said.

Britain’s economy slowed sharply last year, even as much of the rest of the world picked up speed, as the 2016 Brexit vote left consumers with higher inflation and companies turned cautious about investment. Things got worse in early 2018 but the BoE said the slump was probably mostly due to cold weather.

Monday’s figures did little to support comments last week by BoE Deputy Governor Dave Ramsden who said data until that point suggested the economy’s weak start to 2018 would probably prove temporary.

The BoE is looking for evidence that the economy is on a firmer footing before it resumes raising rates.

Britain’s economy probably grew only 0.2 percent in the three months to May, the National Institute of Economic and Social Research think tank said.

Manufacturing output dropped by 1.4 percent in April after a 0.1 percent decline in March, the biggest month-on-month fall since October 2012, the ONS said.

The decline was bigger than any of the predictions in a Reuters poll of economists, and reflected lower production of steel for use in infrastructure and electrical machinery.

EXPORT WORRY

Higher oil production limited the monthly fall in the broader measure of industrial output. But annual output growth of 1.8 percent was weaker than all forecasts.

Business surveys last week suggested official data for May could show an upturn.

Weak data in Britain were in parallel with disappointing figures from the euro zone after strong growth at the end of 2017.

“But there does seem to be something more insidious going on — perhaps a lack of confidence across industry due to trade concerns,” Shaw said.

U.S. President Donald Trump stunned allies on Sunday by backing out of a joint communique agreed by Group of Seven leaders in Canada that had mentioned the need for “free, fair, and mutually beneficial trade”.

British trade minister Liam Fox said the figures looked better on an annual basis.

“Far from the gloom some people report, today’s trade figures show in the year to April 2018 the trade deficit narrowed by 6.7 billion pounds as overall exports rose by 7 percent,” he said in a statement.

The figures also showed the construction sector failed to rebound. Output rose 0.5 percent month-on-month in April, undershooting all forecasts in the Reuters poll.

April capped the weakest three months for construction since mid-2012, and a fall in first-quarter construction orders outside the housing sector suggested little upturn soon.

Starting salaries for permanent jobs in Britain grew in May at the fastest pace in three years, something that may give the Bank of England confidence that inflation pressure is on the rise, a survey showed on Friday.

The monthly gauge of starting salaries for permanent workers from the Recruitment and Employment Confederation (REC) and accountancy KPMG jumped to 63.4 from 60.5 in April, its highest since May 2015.

The survey, watched by BoE officials as a guide of the labour market’s health, also showed the number of permanent staff starting new jobs rose in May at the weakest pace this year.

“Because of the lack of candidate availability we are seeing employers paying higher salaries to attract the right people,” REC director of policy Tom Hadley said.

Bank of England Governor Mark Carney said on Tuesday he expected Britain’s economy would bounce back from a weak start to the year when it was hit by heavy snowstorms, keeping the prospect of higher interest rates on the table.

Speaking to lawmakers, Carney also denied that the central bank had confused investors and households by not raising interest rates earlier this month, in contrast to what had been widely expected until shortly before the BoE’s meeting in May.

“Our view is not that circumstances changed in the first quarter. It’s more likely to have been temporary and idiosyncratic factors that slowed the economy,” he said, echoing comments he made earlier this month.

In February, the BoE said rates were likely to go up sooner and somewhat faster than investors had been expecting, prompting financial markets to price in a rate hike at the central bank’s May meeting as a near-certainty at one point.

Instead, the BoE’s nine rate-setters voted 7-2 to keep rates at 0.5 percent, their emergency level for most of the decade since the global financial crisis, as they waited to be sure that the first-quarter weakness was a weather-related blip.

Carney said on Tuesday that surveys showed households and firms largely expected a rate hike in 2018 and more increases “at a very gentle pace relative to history” after that.

Carney has given several signals over the past few years about when rates were likely to rise, only to be wrong-footed by twists and turns in the economy.

Britain’s economy overall was 1.5-2.0 percent smaller than it would have been if it had grown as the BoE forecast before June 2016’s EU referendum — equivalent to a loss of about 900 pounds for a household on an average income, he said.

Carney added that his main message — that rates are likely to rise only slowly — has proven correct.

Earlier on Tuesday, Monetary Policy Committee member Gertjan Vlieghe said he expected slightly more interest rate increases over the next three years than the market assumption of just under three 25 basis-point hikes.

“Provided the headwinds from Brexit uncertainty do not intensify in the near term, and ultimately fade over the coming years, I think policy rates are likely to rise, in my central view, by 25 bp to 50 bp per year over the forecast period,” Vlieghe said in written answers to questions from lawmakers.

“That is a forecast, not a promise, and will depend on how the economy evolves.”

Sterling, which on Monday hit its lowest level against the U.S. dollar in nearly five months, rose against the euro and the dollar after Vlieghe’s comments.

Vlieghe also backed the idea of the BoE following the example of the U.S. Federal Reserve and publishing forecasts from its policymakers for interest rates.

“The advantages outweigh the risks, in my judgement. I think such a change would represent a further, modest, evolutionary improvement in communications,” Vlieghe told the lawmakers.

But Carney said most MPC members were opposed to the idea. “I think the risks of it being interpreted as a promise, as a commitment are real,” he said.

Britain’s consumer economy failed to rebound in April after snowy weather kept shoppers at home the month before, adding to downbeat data that make a Bank of England rate rise this week unlikely. In a latest sign of slow growth in 2018, retail spending contracted by 3.1 percent year-on-year in April after a 2.3 percent rise in March, the British Retail Consortium (BRC) said on Wednesday.

That marked the sharpest drop since records began in 1995.

While the plunge partly reflects the timing of the sales-boosting Easter holidays — which started in March this year rather than April — the BRC warned of a weak underlying trend.

Marc Ostwald, market strategist at ADM Investor Services, said the figures were “dismal”.

British data have soured over the past month, suggesting the economy has not yet recovered from a weak start to 2018 in the manner most economists and BoE officials had expected.

A lack of clarity around Britain’s terms of departure from the European Union in less than a year, as well as a slowing euro zone economy, are among reasons cited for Britain’s disappointing performance of late.

The BoE now looks unlikely to raise rates on Thursday, according to a new Reuters poll of economists who have mostly pushed back forecasts for a rate hike to August. [BOE/INT]

Adding to mixed signals, a survey of recruitment firms on Wednesday showed demand for permanent staff grew at the weakest pace so far this year during April, though growth in starting salaries remained robust.

RETAIL “IN DISTRESS”

Looking at retail sales over the three months to April, which smoothes out March’s jump and last month’s plunge, the BRC said overall spending was up just 0.4 percent year-on-year.

That marked the third-worst reading since the global financial crisis.

The BRC said the retail market was likely to remain “extremely challenging”. Earlier on Wednesday, baker Greggs (GRG.L) warned profit for 2018 was likely to disappoint, blaming a dip in consumer demand.

Already this year Toys R Us UK, electricals group Maplin and drinks wholesaler Conviviality have filed for protection from creditors.

Separately, payment card firm Barclaycard said consumer spending — which includes a broader range of purchases such as holidays and eating out — rose at an annual pace of 3.4 percent in April after growing just 2.0 percent in the previous month.

Excluding the snow-hit March, April marked the weakest increase in five months.

“The UK seems to be caught in a holding pattern, with people still budgeting carefully,” Barclaycard managing director Paul Lockstone said.